Target Corporation — Form 10-Q Summary
Period clarification: The supplied filing is for the quarter ended April 30, 2016 (first quarter of fiscal 2016), not 2015 Q1. Comparatives are for the three months ended May 2, 2015.
Business context
Target operates as a single retail segment, serving customers through stores, online and mobile channels. The prior-year comparison includes the pharmacy and clinic businesses sold to CVS in December 2015; their $1.075 billion of prior-period sales makes reported revenue comparisons less like-for-like.
Financial results and key metrics
| Metric | Quarter ended Apr. 30, 2016 | Prior-year quarter |
|---|---|---|
| Sales | $16.196 billion | $17.119 billion |
| Gross margin | $5.011 billion; 30.9% of sales | $5.208 billion; 30.4% |
| Segment profit (EBIT) | $1.323 billion | $1.261 billion |
| Continuing-operations earnings | $614 million | $651 million |
| Net earnings | $632 million | $635 million |
| Diluted EPS | $1.05 total; $1.02 continuing operations | $0.98 total; $1.01 continuing operations |
| Operating cash flow, continuing operations | $253 million | $777 million |
| Cash and cash equivalents | $4.036 billion at Apr. 30, 2016 | $2.768 billion at May 2, 2015 |
| Long-term debt and other borrowings | $12.596 billion, plus $1.627 billion current | $12.585 billion, plus $112 million current |
Sales fell 5.4%, primarily because the exited pharmacy and clinic businesses contributed $1.075 billion to the prior-year period. Comparable sales grew 1.2% (store channel 0.6%; digital contributed 0.6 percentage points); digital comparable sales increased 23%. Gross margin rate improved 0.5 percentage points, and SG&A rate declined to 19.4% from 19.9%. Adjusted diluted EPS from continuing operations, a non-GAAP measure, was $1.29 versus $1.10.
GAAP continuing-operations earnings included a $261 million pretax loss on early debt retirement ($0.26 per diluted share). Net interest expense was $415 million, compared with $155 million. The effective tax rate was 31.6%, versus 34.8%. The reported continuing-operations EBIT margin was 8.2%, versus 7.4%.
Cash, debt and shareholder returns
Cash provided by operations was $247 million, including $253 million from continuing operations and $6 million used in discontinued operations. Continuing-operations cash flow was lower year over year largely because Target paid approximately $500 million in taxes, primarily related to the pharmacy transaction, and because of working-capital movements. Capital expenditures were $285 million. The company paid $336 million in dividends and repurchased $893 million of shares during the quarter.
In April, Target issued $2 billion of unsecured debt: $1 billion at 2.5% due 2026 and $1 billion at 3.625% due 2046. It used cash and issuance proceeds to repurchase $565 million face value of debt for $820 million, recording the $261 million loss. In May, it repurchased a further $824 million face value for $981 million; the additional approximately $160 million loss was expected to be recorded in the second quarter. Target reported a $2.25 billion revolving credit facility with no borrowings and stated it expected to remain compliant with debt covenants.
Changes, outlook and risks
- Business mix: The CVS pharmacy and clinic sale reduced reported sales; management attributed improved gross and SG&A rates partly to the transaction, alongside favorable sales mix and cost savings.
- Canada exit contingency: A March 2016 settlement with former Canadian landlords remained subject to creditor and court approval. If not approved, additional losses beyond amounts accrued could be material; Target said it could not reasonably estimate a range.
- Other legal matters: Data-breach-related investigations and litigation remained pending. The financial-institutions settlement received final court approval in May 2016. A shareholder securities class action relating to prior disclosures about Canadian expansion was filed May 17, 2016; Target said it intended to defend the case.
- Outlook: The filing does not provide a numerical earnings or sales forecast. Management said liquidity should be adequate for operations, investment, debt obligations, Canada-exit costs, dividends and planned share repurchases, and expected continued access to capital markets. It cautioned that credit-rating changes could affect borrowing access and costs. The company also noted quarterly results are seasonal and may not indicate full-year performance.
- Other items: Target adopted share-based-payment accounting guidance, recognizing $17 million of excess tax benefits in the quarter. Management reported effective disclosure controls and no material changes to internal control over financial reporting.
Important facts for investors to verify
- Confirm the period: this filing covers the quarter ended April 30, 2016, not 2015 Q1.
- Review comparable-sales and margin trends separately from the reported sales decline caused by the CVS business sale.
- Assess the cash-flow impact of transaction-related taxes, working capital, debt tender payments and planned capital returns.
- Track approval and final costs of the Canadian landlord settlement, including the possibility of losses beyond the accrual.
- Monitor debt levels, refinancing costs, the second-quarter debt-retirement loss, credit ratings and continued covenant compliance.
- Follow the remaining data-breach proceedings and the newly filed shareholder lawsuit; the filing does not quantify possible outcomes for these matters.